Looking For Clues
There are big benefits, for you and your clients, to engaging independent forensic engineers early in the claims process--even when the claim doesn't get paid
The stereotyped view of the claim situation is that of a totally adversarial process: the broker and their client on one side fighting to get the claim paid, and the insurance company on the other trying to deny coverage with everybody lawyering up and hiring experts to prove their case in court. The reality, of course, looks less like the plot of a John Grisham novel, according to Chris Giffin, president of Toronto-based forensic engineering firm Giffin Koerth.
“Every insurance company that I’ve ever talked to has told me time and again, all they want to know is the truth; what happened. ‘If we have to pay the claim, we pay the claim.'”
Giffin says the value proposition of his firm is to produce objective determinations of root cause in loss situations.
“What we offer is an unbiased assessment of the cause such that you get a clear picture of liability for a loss,” he says. “The best scenario is we get in a room with the insurer, the broker and the insured and we explain our findings such that the insured understands why this loss occurred and then the broker and the insurance company can explain why this loss is or isn’t covered under their policy.”
Whether or not a claim is covered, understanding root cause benefits both insureds and insurers, says Giffin. Insureds gain important risk management knowledge while insurers can better assess the risk.
“If you don’t understand the risks, then how do you figure out what the premium will be the next year? Have they taken steps to ensure the loss will not take place again?”
Firms like Giffin Koerth are usually engaged by insurers, independent adjusters or counsel for insurers. However, it is becoming more common for brokers to initiate a forensic investigation to protect their clients’ interests in larger claims situations.
“There are times when coverage is a question,” says Scott Francis, senior vice president of claims at Aon Reed Stenhouse. “By engaging an engineer on behalf of the client, we’ve been able to establish a cause and origin which would support that there is coverage afforded.”
The usual method that brokers will use to initiate a forensic investigation is through the professional fees coverage that is a common provision in many industrial boiler and machinery policies and commercial property policies. This provision will cover the engineer’s fees in the event the loss is indeed covered, notes Giffin.
However, some brokers are not waiting until a claim arises to get value from the services of forensic engineers.
“There’s a place for it when you’re actually underwriting the risk and there are questions we need answered,” says Eileen Greene, partner and vice president at HKMB Hub International. “Let’s say we’re about to embark on insuring a chemical plant and we’re not sure what company we want to go to. Sometimes the more comprehensive the information that we bring to the company upfront is going to give us an edge on their pricing.” Forensic engineers engaged upfront ” may be able to evaluate something that could potentially take place that they need to make certain changes to their plant, whether it’s their electrical or how they’re stacking things,” she says.
In claim situations, brokers have to look out for their clients’ interests on a number of fronts. On the one hand, the broker’s job is to do the utmost to make sure that covered losses are paid for in as timely a fashion as possible. Brokers can also be key in helping mitigate further losses resulting from the initial claim. Engaging forensic engineers early on in the claims process can be extremely helpful in achieving both of these goals, says Giffin.
In determining whether or not a loss is covered, time is of the essence.
“Your case is only as strong as the physical evidence you have available to you,” he says. “The physical evidence certainly deteriorates over time.” Brokers that proactively engage forensic engineers right away increase the likelihood that the claim will be paid if it becomes adversarial or isn’t investigated until later.
Depending on how the claim proceeds, the forensic evidence may not be needed until much later, if at all. But that doesn’t mean it still isn’t worth gathering forensic evidence as soon as possible.
“If you do nothing with it for a period of time, that’s fine. At least the integrity of the evidence has been looked after.”
Investigating a physical loss and gathering the evidence right away can also be a critical step in mitigating an even bigger business interruption loss that may result from the physical damage loss. For example, a manufacturing facility might suffer a million-dollar physical loss to a production line. But the bigger issue is often the line being down at all.
“If you have a line that is down and it is costing you half a million a day, that million of physical damage is very quickly [surpassed] by the business interruption,” says Giffin. “That’s why you’re bringing us in early so we can identify how to best save evidence of the origin of the loss, maintain the integrity of it, and get on to mitigating the damages by getting the facility back up and running.”
1st, 2nd and 3rd Parties
Giffin also points out that many large industrial facilities and utilities are self-insured and/or have high deductibles (e.g. $500,000 and above). Consequently, they need to do everything possible to mitigate damages. A loss that exceeds the deductible means filing a claim with the insurance company for the excess.
“The company can come in and say ‘You messed this up. Had you mitigated your damages properly, you would have been within your deductible so we’re not paying,'” says Giffin. Engaging the forensics firm can play an important part in avoiding that conversation.
High-deductible insureds will also be keenly motivated to try and subrogate a loss to a third party rather than pay for it themselves. For example, an industrial facility that incurs a $10 million loss, “if we investigate the loss and discover the cause was a bad valve, and the valve is poorly manufactured, that whole $10 million can be subrogated against the valve manufacturer,” explains Giffin. “The loss wasn’t due to some error or omission of the facility that is insured.”
“Any loss that’s $100,000 or greater, if there’s a need for an engineer you have to look at it,” recommends Aon’s Francis. “Because there are subrogation possibilities and a multitude of different things.”
Brokers that engage forensic engineers on behalf of their clients are not necessarily taking an adversarial stance.
“The way that we position it is not like they’re the big bad insurance company and we’re questioning it,” says Hub’s Greene. “The resources of an insurance company are sometimes limited. Sometimes it’s great to bring in that outside expert to come in and evaluate an area that perhaps they don’t have the internal expertise in.”
In relating the story of a recent situation with a client where the work of the forensic engineers she engaged produced evidence that may sway the insurer towards paying a claim it previously denied, she points out how the situation helped her secure the client’s business for the long term, regardless of the outcome of the claim.
“When the loss wasn’t covered, there was no one saying this is how and this is why. If it’s not a covered loss, it’s not a covered loss. But in this particular case, taking it and throwing every resource we have at it gives us an edge because they’re buying a policy for when they have a claim. And when it happens, that’s when we have to put our foot to the pedal.”
Copyright 2011 Rogers Publishing Ltd. This article first appeared in the February 2011 edition of Canadian Insurance Top Broker magazine.